In our continuing analysis of the financial incentives built into the Affordable Care Act (ACA), we examine how the law impacts employer sponsored plans for small businesses and their employees. You may actually be better off encouraging your employer to not provide health insurance coverage. Insane as it sounds, you may actually want to ask your boss, "Please give me less benefits."
This strange circumstance arises from the law treating employees who have access to affordable employer sponsored insurance differently than those who do not. Instead of considering the cost of insuring the entire family, the affordability of employer-sponsored insurance considers only the cost of insurance for you alone. Americans offered insurance through their company will in many cases have their families disqualified for insurance subsidies, even if they would otherwise fall within the income limits for such subsidies.
This reading of the law essentially punishes your family if you have the fortune of having employer sponsored coverage. The result is that many families could find themselves thousands of dollars better off if their employer did not contribute to their health insurance costs, or simply did not provide health insurance at all.
Our analysis suggests that employees and employers across the country should sit down and discuss the potential merits of discontinuing employer sponsored plans. The company would end up saving money while the employee would then benefit from thousands of dollars of tax subsidies - a clear win-win situation for both parties.
Our Detailed Analysis
Uneven Standards for Affordable Coverage
Under the ACA, while all Americans can choose to enroll in insurance through the state marketplaces, families are eligible for insurance subsidies if they are not offered affordable coverage through an employer sponsored plan.
What then is affordable coverage? The Department of Health and Human Services (HHS) has ruled that an employee receives affordable coverage, if his/her share of the employer sponsored plan will cost them less than or equal to 9.5% of his/her annual income for self-only coverage. Contrast this to how subsidies are determined for households with no access to an affordable employer sponsored plan. There, families with an income of up to 400% of FPL would receive subsidies if the cost of insuring the entire household were above 9.5% of household income.
Having two different standards for subsidy eligibility produces strange incentives when it comes to employer sponsored health insurance. Employers that help pay for an employee's health insurance costs may actually hurt an employee by disqualifying his/her family from subsidies for the rest of the household. Imagine workers asking their employers not to pay for health insurance. Sounds insane... but it is financially sensible!
Doing The Math
We begin with an example from New York State, using the premium data we've referenced previously. In our analysis, we'll use the premiums for MVPHP-HMO for both the individual and small group plans. For an employee with a family, the monthly premium under the small group plan would cost an average of $1,138 monthly with self-only coverage priced at $399. On an annual basis this comes out to $4,788 for self-only coverage and $13,646 for the entire family. The family in our case study is a household of 4 and pulls in an income of $50,000.
Scenario A: Employer Offers Health Insurance but the Employee is responsible for 100% of the premium
For a household making $50,000 a year, the self-only coverage of $4,788 would exceed the 9.5% test and the family would be eligible for subsidies on the individual marketplace. Since they are eligible for subsidies on the exchange, they would find their health insurance expenses limited to $3,365 annually for the second cheapest silver plan on the exchange (the ACA subsidies would pay for the rest of the cost).
Scenario B: Employer Offers Health Insurance and pays 50% of the Employee's premium and 0% for the rest of the family
Many small businesses opt to contribute some amount to the health care premiums their employees pay. If the company decides to pay half of the premium for the employee, the employee's premium is reduced to $2,394 a year, well under 9.5% of household income test. The entire family is now disqualified for federal subsidies on the individual exchange.
In order to acquire insurance for the rest of the family, they could opt to:
1) Purchase insurance for the entire family through the employer plan, costing them a total $11,252. $13,646 for the cost of the family plan - $2,394 employer contribution = $11,252.
2) Purchase insurance for the rest of the family on the exchange for a total cost of $9,514. $2,394 annual premium for the employee + $7,120 for 3 person household through New York Fidelis = $9,514.
In both options, simply by offering almost $2,400 dollars in benefits, the employer actually costs the family in the best case (option 2) an additional $6,000. Of course there is a third option.
3) The employee could simply ask the employer to keep the $2,400 dollars so that insurance would not qualify as affordable, and the entire family could receive insurance for $3,365 on the individual exchange.
Scenario C: The employer covers half the insurance premiums for both the employee and the family
Even if the employer chooses to pay half of all premiums on the family plan, the employer sponsored plan would cost the worker $6,823 to cover this family of four. Compare this to the $3,365 expense the family could choose to get on the individual exchange and its clear what the most preferred and economical choice would be.
When we consider the size of federal subsidies for some families on the individual exchange, the double standards for eligibility create clear incentives in changing how we think about employer sponsored health insurance. Health benefits have always been considered an important factor when it comes to employment, so it comes as a shock that beginning in 2014, receiving such benefits may actually make you worse off.
Not often do you find the case where a worker can tell their boss, "Keep your money, I'm richer without it!" Yet as with the case of the subsidy cliff, when we consider the thousands of dollars of generous subsidies a family would be foregoing, it would be irrational to do otherwise. Instead of accepting money from your boss, it would be more rational to receive a much larger check from the federal government.
We encourage consumers and small business owners to conduct more research into their specific situations - doing so may save you and your family thousands of dollars. We ran our scenarios with a representative of the Advanced Resolution Center at Healthcare.gov, the federal government's consumer website for health insurance, and were told, "Yes, you may be better off if your boss kept the $2,400 dollars."